Soybean Rally Ahead

By

Cheryl Strauss Einhorn

Updated July 17, 2000 12:01 a.m. ET

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A buying opportunity. That's what the selloff in soybean prices presents. The market has prematurely priced in a perfect crop, even though the crop's crucial pod stage won't even begin before month's end.

There are signs, too, that trouble is taking root. First, the shape of the forward curve in the futures market is inverted, which is indicative of a near-term tightness in supply.

So tight is the current market that cash prices are commanding hefty premiums over August futures around the country, especially in those places where major domestic crushers are located. For instance, in Decatur, Illinois, where
Archer Daniels Midland
is located, cash soybeans are selling for 20 cents per bushel over futures prices.

The reason: China has had an unexpected appetite for U.S. beans this year. Although it had planted a larger crop than usual, the country has been plagued by drought all spring. Just last week, temperatures soared above 100 degrees in Beijing, with no apparent respite ahead.

In addition, China has been trying to protect its domestic soybean crushing business and has enacted prohibitively expensive import taxes on soybean products: meal and oil. Hence, China has been forced to import mass quantities of beans to keep those plants humming. "Imports have run at a torrid pace," says Doug Jackson at FC Stone, a Des Moines farm cooperative. "It has caught even the most astute people in the market off-guard."

Nonetheless, the U.S. Department of Agriculture failed to update the China forecast in its most recent crop report last Wednesday. By not factoring in the crop damage, the USDA showed fewer beans being imported by China this year than last year. "They are going to have to dramatically increase that import figure," asserts Bill Gary, president of Oklahoma's trading shop, Commodity Information Systems. "It looks like they are going to import a record amount of beans."

Further, soybean oil faces less competition from canola and rapeseed this year. Those crops are smaller since prices were so low last year that farmers opted to plant other items.

So, why is the market so downtrodden? Its bearish price pattern stems from a myopic focus on U.S. weather. Since May, prices have fallen more than 20% as drought fears proved wrong and rain in the Midwest has been plentiful.

Key Commodity Indexes

CRB Group Indexes

7/14

7/07

Yr. Ago

CRB Futures

220.60

219.33

183.60

Industrials

204.77

199.77

180.40

Grain/Oils

151.31

156.11

148.20

Livestock

246.67

251.84

197.10

Energy

311.82

307.39

193.20

Precious Metals

267.68

263.43

222.00

Barron's ~ Bridge Telerate

Still, crop conditions are far from ideal. The good weather hasn't been uniform. While Nebraska, Kansas and South Dakota have been too dry, parts of the Midwestern crop are literally under water. Flooding has been reported in Wisconsin, northern Illinois and Minnesota. In Ohio, rainfall for the last 30 days has registered a soggy seven inches, three inches above normal.

Only 66% of the soybean crop registered in "good to excellent" condition in last week's USDA findings. And while that was unchanged from the prior week, it is down from 71% a year ago.

Last year's crop yields fell to their lowest level in four years, at 36.5 bushels per acre amid a July hot spell. Since this year's crop is already in 5% less good condition, it needs to improve dramatically in the next few weeks to meet the USDA's expectations of 40 bushels per acre. That would be the second-highest yield in history.

The market seems ready for it. Since May, when drought fears were at their peak, prices for the August futures contract have fallen $1.30, to $4.62 per bushel. Should the market recognize the China problem, or the current variations in U.S. crop conditions, or if the ideal weather turns hot and dry in the Midwest, expect a rally.

Last year, the market hit its low in July at $4.05 per bushel and then, when the hot weather took hold, prices shot back to $5.22 by September. "We're not going to have record bean yields this year," predicts Gary, who is long both August and November beans. "We're looking for a $1-$1.25 rally before harvest."

E bbing fears of a Brazilian frost sent coffee prices down 12% Friday, to 90 cents per pound. In oil, OPEC's indecision about Saudi Arabia's request to boost output held futures hostage; prices ended slightly higher at $31 per barrel.

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